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We All Make Mistakes
Almost everyone has had blemishes on his or her credit history at some point. In these tough economic times, this is more common than ever. Maybe you had to let a payments wait for 30 days, or maxed a credit card or two to float you between paychecks. You might have had to file for bankruptcy or been foreclosed on. Whatever the situation, almost everyone has had to live through it, but at what cost?
What do mistakes cost you?
A lot of people have problems with not knowing consequences, or how bad credit ratings are hit by certain actions. For instance, a lot of people don’t know the damage a late payment on the car or mortgage might do. They might not know what kind of shape they will be in after a debt settlement in terms of their credit score. As if that weren’t enough, the same mistakes hurt some people more than others. There appears to be no consistency and no way to predict the effects of a given action. Not having clear information makes it difficult for many people to make good decisions during difficult financial situations.
The air has cleared
Finally, FICO has shed some light for the public on just how their credit is affected by common credit mistakes. FICO has recently made public its guidelines for point reductions in credit scores for given offenses: bankruptcy, 30 day late payments, debt settlements, foreclosures, and maxing out credit cards, for example. The formula dings people with higher scores than those with low scores. For example, if your credit score is 680 a maxed out credit card will cost you between 10 and 30 points. If you have a score of 780 - you lucky devil - the damage is between 25 and 45 points.
Big mistakes equal big reductions
As one would assume, the greater the problem the bigger the point reduction is from your credit score. Once again, the higher your score the more damage is done by the same mistakes. The biggest deductions are for foreclosure and bankruptcy. Foreclosure will deduct between 85 and 105 points if for a score of 680. If the score is 780 the foreclosure will cost between 140 and 160 points. Bankruptcy makes things worse, and a score of 680 will take a 130 - 150 hit, and a 780 score will have 220 to 240 points deducted.
Settlements can cost you, too
Foreclosure and bankruptcy seem like obvious problems that would cost points on a score. A significant deduction that isn’t so obvious is a debt settlement. People may think they are getting their finances together and making a positive move when they settle a debt for a percentage of the total. However, they may take a larger credit score hit than anticipated. FICO lists debt settlement as a 45 to 65 point deduction for a 680, and a 105 to 125 point ding for a 780 - compared to a 60 to 80 point ding and 90 to 110 points off for a payment 30 days late. At least now people can make an informed decision on whether or not to settle or continue to pay late.
Work hard to keep what you have
Looking at the penalties, one can see how important it is to keep good credit once you have it. The penalties being higher for higher scores stress the need to keep a high score. The fall is precipitous, but the climb back up is longer and more arduous.
Tags: common credit mistakes, credit history, credit mistakes, FICO
